Charitable gift annuities growing in popularity

Depending on your situation, they can offer attractive income and some nice tax breaks, even as they help favored causes.

But there are some caveats. If you've thought about jumping in, it pays to consider how the move fits with the rest of your financial plans.

It's important to understand what gift annuities are--and are not. They are contracts between a charity and a donor that call for the charity to make lifetime payments to a donor or a donor and spouse, and in return the charity collects the remainder of the gift when the donor (or spouse) dies.

But they aren't the same as commercial annuities. Income rates on charitable annuities are lower than with commercial products, though the disparity is mitigated somewhat by the preferential tax treatment on the money.

Part of the payment from the annuity--the part that is considered a charitable donation--is tax-free, while a portion is taxed at ordinary income rates. And a portion of the gift itself is eligible for a tax deduction when made. Issuing charities can provide interested donors with illustrations of how an individual's tax situation would be treated under a gift annuity.

"There's been a significant increase in the number of charities issuing annuities," said Frank Minton, chairman of the American Council on Gift Annuities in Indianapolis (www.acga-web.org). The sheer demographics of an aging U.S.

population is driving much of the increase, Minton said, as more retirees, and those close to retirement, look for stable income sources.

Between 2,000 and 3,000 charities now offer gift annuities, the group estimates. Many of them offer standard payout rates, which can be found on the council's Web site. One example: A 75-year-old might expect to receive annually 7.1 percent of the amount donated, but the actual "return" may be higher once the effects of tax incentives are factored in.

A survey the group performed in 2004 showed nearly a quarter of charities offering gift annuities started their programs within the last five years.

At Northwestern University, about $7 million of $35 million in total assets was invested in the school's charitable annuity program last year.

"These are great for older individuals who want a fixed income," said Daniel Ott, senior director of planned giving for the University of Florida. "Even if [the donor's] assets give out, the charity is still obligated to make the payments."

That situation is rare, experts said, but the possibility is the reason that checking out a charity's credit rating is vital for anyone considering the move. It also makes sense to read, or hire an accountant to analyze, the charity's financial records.

"We've had a few [donors] outlive their life expectancy, but none to the risk of depletion" of the original donation, said Elizabeth Roghair, director of gift planning at Northwestern.

Roghair said the trend is catching on with wealthier donors who are trying to whittle their assets below the point where their heirs would have to pay estate tax on their inheritance.

How to determine if a gift annuity is right for you?

-- First, make sure you indeed have philanthropic tendencies because commercial annuity providers almost always pay higher rates. But if you plan to make some large gifts to charity in retirement, blending the gift with the annuity might be a better strategy than making an outright cash gift.

-- Finally, remember there's no turning back with the annuities. They are irrevocable and most don't have the bells and whistles (such as inflation protection) that are becoming more common in commercial annuities.

"I worry about an investor who looks at the income rates of an annuity, compares it to a bond, and thinks they are the same deal," he said, referring to the fact that while the bond may yield less, the investor still has access to principal.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you and your question in a future column.